OUTLOOK: The financial sector has enjoyed several years of robust performance, buoyed by central banks' rate-hiking cycle. Can this momentum persist as interest rates begin to decline? In your view, what are the key factors that could underpin the sector's resilience over the medium to long term?
The rally in European banks is poised to continue. The macroeconomic backdrop remains highly supportive: the EU is in a phase of fiscal expansion, bolstered by Dutch pension reforms that are steepening the long end of the yield curve.
Rates hovering around 2% for an extended period across the 1-5 year segment strike an optimal balance—providing healthy deposit spreads while remaining accommodative for consumer and corporate lending. The steep yield curve is a boon for banks' net interest margins, while fee income is surging alongside transaction volumes, further enhancing profitability.
Costs are well-contained, and ongoing M&A activity coupled with digitalization will sustain efficiency gains, supporting ROE levels of 11-12% and enabling robust capital distributions. Asset quality should hold steady at current rate levels, regulatory headwinds are easing, and the sector's cash yield—via dividends and buybacks—stands at an appealing 8-9%.
That said, valuations are now roughly 20% below their long-term median, trading at a 35% discount to non-financials. Are we approaching the rally's end? Historical price patterns suggest we're in the final phase of normalization.
Yet, this raises a pivotal question: Should risk premiums for banks mirror those of past eras, when models were lightly capitalized and loosely regulated? Today's banks are capital-intensive, tightly supervised, and far more resilient. This evolution warrants a reevaluation of premiums for both bonds and equities, potentially fueling further upside.
FINANCIAL DEBT: The macroeconomic environment in Europe remains marked by significant political uncertainty. Countries traditionally considered “core,” such as Germany and France, are going through challenging phases: Germany for the renunciation of austerity and the need to transform its economic model, and France is struggling to reach political agreements to implement debt-containment measures. How is this affecting the European banking sector and, more specifically, the European financial credit market?
Political uncertainty in core markets like Germany and France is indeed testing Europe's macroeconomic fabric, but paradoxically, it may ultimately reinforce the banking sector's stability.
Germany's shift away from austerity toward a more investment-oriented model—amid its industrial transformation—could stimulate lending demand, benefiting banks' loan books without immediate fiscal blowback.
In France, delays in debt-containment pacts heighten short-term volatility, potentially pressuring sovereign spreads and indirectly influencing bank funding costs. However, European banks have fortified their balance sheets post-GFC, with CET1 ratios averaging over 15% and diversified revenue streams that buffer sovereign-linked risks.
European banks currently enjoy the strongest earning per share growth and upgrade/downgrade ratio. This resilience is evident in the financial credit market, where spreads have tightened modestly (e.g., senior unsecured bonds yielding 150-200bps over swaps) despite the noise. We're seeing selective opportunities in subordinated debt from smaller well-capitalized issuers, as consolidation is accelerating credit upgrades.
Overall, while near-term elections and policy gridlock could cap upside, the sector's low correlation to sovereign woes—coupled with ECB backstops—positions financial credit as a defensive yield play in an uncertain landscape.
STRATEGY: Axiom Obligataire is your flagship fund, with a 16-year track record and assets close to reaching 1 billion euros. What are its main strengths and the management expertise that make it a unique fund in the European landscape for investors in financial credit?
Axiom Obligataire stands out as a specialist in European financial credit, blending a proven 16-year track record of consistent outperformance—delivering annualized returns of around 4,5% net of fees—with AUM now approaching €1 billion.
Its core strength lies in our bottom-up, issuer-centric approach based on internal tools developped over the last 16 years enabeling us to capture mispricings amid sector cycles. Unlike broader fixed-income funds, we focus exclusively on financials, enabling deep expertise in bank-specific drivers like regulatory changes, M&A dynamics, and balance-sheet optimization.
Our team's 20+ years of combined experience—spanning buy-side credit roles at major institutions and in-house structuring—allows us to navigate the sector complexities. For European investors seeking yield without excessive volatility, Axiom Obligataire offers a unique blend of income, capital preservation, and sector-tailored insights in a fragmented market.
PORTFOLIO UPDATE: What is the current positioning of the Axiom Obligataire portfolio ? In which segments of financial credit do you currently see the most attractive sources of value ?
The Axiom Obligataire portfolio is positioned defensively yet opportunistically, with ~60% in investment-grade financials (split evenly between senior and subordinated), 25% in high-yield credits (primarily AT1 and Tier 2), and 15% in cash/special situations for dry powder.
Duration is actively managed at around 4 years to balance yield pickup with rate sensitivity, while geographic exposure tilts toward the Eurozone periphery (40%) for richer spreads, balanced by core issuers for stability. We're overweight in mid-tier banks undergoing consolidation.
The most attractive value today lies in subordinated debt from mid-cap European banks—yields of 5-6% with spreads at 250-300bps over benchmarks, offering upside from rating migrations as M&A waves crest. AT1 remain resanbly attractive, while special situations in Italian and Spanish consolidations present event-driven alpha. This setup targets returns excessing 4.5-5% total return over the next 12 months, prioritizing resilience in a softening rate environment.
AT1: A significant portion of your portfolio is invested in AT1 instruments. What is your view on this segment, and why do you find it particularly attractive?
AT1 and RT1 currently weight 31% of the portfolio.
For Italian investors, European financial debt provides geographical diversification and superior yields (4-5% versus BTPs at 3.5%), within an industry that's led profitability charts over the past 3 years. The macroeconomic tailwinds persist, with bank consolidation driving further credit rating enhancements that could unlock capital gains down the line.
AT1 offer high coupons (6-8%), yet with downside protection from banks' elevated Core Equity (European Banks CET1 ratio currently exceed 15% ). Post-2023 volatility, spreads have normalized to 250-300bps over swaps. We favor issuers with strong capital buffers and diversified models less exposed to rate reversals.
In the curent macro-economic context of mild steady growth and benign regulation, AT1 still offers yield carry plus potential spread compression—making it a cornerstone for yield-hungry portfolios.
ITALY: What is your view on the Italian banking sector, which is currently undergoing a strong wave of M&A activity?
For managers like us, specializing in bank and insurance securities, Italy's M&A surge is transforming inherent risks into compelling investment opportunities, with a significant portion of sector performance likely to emanate from these deals over the next 12 months.
While we cannot overlook the political overlay—as evidenced by UniCredit's withdrawn bid for Banco BPM in July 2025 amid government-imposed golden power conditions—Italy's fragmented banking landscape offers ample alternatives for consolidation.
The BPER Banca acquisition of Banca Popolare di Sondrio exemplifies the high-quality transactions we anticipate: completed with BPER securing ~70% of Sondrio's shares by late July 2025, it unlocks ~€290 million in annual pre-tax synergies by 2027, comprising €190 million in cost savings from branch optimization (over 2,000 combined locations) and operational efficiencies, plus €100 million in revenue uplift via cross-selling in wealth management and payments.
These dynamics are poised to drive combined net income above €2 billion in 2027—a 40% premium to BPER's stand-alone targets—with RoTE reaching ~15% and a cost/income ratio of ~46%. The deal has bolstered credit profiles, evidenced by S&P's upgrade of Sondrio to 'BBB/A-2' (Stable Outlook) and affirmation of BPER's ratings, alongside Fitch's positive outlook on the acquisition's medium-term prospects.